Event context and recent share performance

Valero Energy (VLO) has moved onto many investors’ radars after a strong run, with the stock up about 15% over the past month and 8.7% in the past 3 months.

That momentum sits alongside a 13.8% gain year to date and a 43.7% total return over the past year, putting fresh attention on what is driving sentiment around this large US refiner and fuel producer.

With the share price at about $188.19 and a 30-day share price return of roughly 15%, investors appear to be reassessing both Valero Energy’s earnings power and its risk profile. The 1-year total shareholder return of about 44% underlines how strong the overall run has been.

If Valero Energy’s move has caught your attention, it can be a useful moment to see what else is setting the pace in energy, including aerospace and defense stocks as another way to broaden your watchlist.

With the shares now close to the latest analyst price target, and a modelled intrinsic value implying a much larger gap, the key question is simple: is Valero Energy still undervalued, or is the market already pricing in future growth?

Price-to-Earnings of 38.5x: Is it justified?

At a last close of about $188.19, Valero Energy is trading on a P/E of 38.5x, which points to a richer valuation than many peers in its space.

The P/E ratio compares the current share price to earnings per share, so a higher multiple usually means investors are willing to pay more today for each dollar of current earnings. For a refiner and fuel producer like Valero Energy, that often reflects expectations for future profitability, as well as how investors weigh recent earnings quality and sector conditions.

Here, the current P/E of 38.5x stands well above the US oil and gas industry average of 13.4x and also above a peer average of 26.8x. This suggests the market is assigning a higher valuation multiple than the wider group. It is also ahead of an estimated fair P/E of 23.7x that our models point to as a level the valuation could move towards over time if sentiment or expectations were to moderate.

Result: Price-to-Earnings of 38.5x (OVERVALUED)

However, earnings volatility in refining and the recent 2.2% revenue decline could quickly test whether a 38.5x P/E leaves much margin for disappointment.

Another view: cash flows tell a different story

The high 38.5x P/E paints Valero Energy as expensive, yet our DCF model suggests a different conclusion. With the shares around $188.19 and our estimate of future cash flow value at $313.96, the stock screens as undervalued by about 40%. This raises the question of which signal to give more weight: earnings or cash flows?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Valero Energy for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 881 undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Valero Energy Narrative

If you see the numbers differently or prefer to test your own assumptions against the data, you can build a personalised view in minutes with Do it your way.

A great starting point for your Valero Energy research is our analysis highlighting 2 key rewards and 4 important warning signs that could impact your investment decision.

Looking for more investment ideas?

If Valero Energy has sparked your interest, do not stop there, broaden your watchlist now so you do not miss other opportunities that could fit your style.

• Spot potential value opportunities early by checking out these 881 undervalued stocks based on cash flows that might be priced below what their cash flows suggest.
• Ride powerful themes by scanning these 23 AI penny stocks that could benefit from growing adoption of artificial intelligence across sectors.
• Target regular income by reviewing these 13 dividend stocks with yields > 3% that offer yields above 3% alongside company specific fundamentals.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.